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Minimal Disclosure Sparks Shareholder Suits
According to an article in the June 17th issue of The Wall Street Journal, a number of major corporation shave recently been sued by shareholders for allegedly delayed or sketchy information about setbacks. Corporations often mismanage crises by releasing the minimum amount of information that's legally required. And in an upbeat economy, when so many companies are doing well, any negative information about a company is not well-received by analysts and investors.
According to the Journal, some legal experts had expected fuller disclosure of bad news after the Private Securities Litigation Reform Act of 1985. This legislation was supposed to limit a corporation's liability for any good-faith projections that are coupled with clear warnings that actual results may differ. But the protection doesn't extend to state courts. Consequently, the number of corporations sued hasn't declined, nor has the quality of "negative predictions" significantly improved.
Almost 87% of 308 large companies surveyed this month by the American Society of Corporate Secretaries responded that the 1995 law hasn't altered their attitudes about divulging bad news. Almost 44% responded that they still limit initial disclosure to what's legally required. Companies are supposed to disclose "material facts," which courts generally view as information that investors would consider important in making investment decisions.
According the the Journal, limited disclosure frequently backfires - by battering the stock price and triggering shareholder suits. But excess frankness about negative corporate developments also carries risk. If corporations release too much information, they risk being accused of misleading people. The Journal article doesn't discuss the quality of corporate data and information, nor factors responsible for negative corporate data. The article was written by Journal staff reporter Joanne Lublin, and appears on page B-27